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Urban Outfitters' E-Commerce Paradox: Higher Prices Online

May 28, 2013 11:52pm

Urban Outfitters (NASDAQ:URBN) got an extra $9 million in sales during its first fiscal quarter by shipping online orders directly from its stores—orders that it wouldn't have been able to fulfill from distribution centers, Internet Retailer reported. But the chain also discovered something highly counterintuitive to what most retailers expect from e-commerce.

That $9 million came thanks to the merged inventory system that the chain implemented last year. "Most of it would not have been shipped because it would have been out of stock in the distribution centers had we not had the ability to do pack-and-ship," Urban CEO Richard Hayne told analysts. "We do get the benefit now that we can see across both retail channels, one inventory. We get to reduce the amount of inventory. There's not as much inefficiency in holding the inventory in the two tranches: one in the direct-to-consumer fulfillment center and the others in the stores." He added that he hopes for a 5 percent drop in the necessary inventory levels this year due to ship-from-store efficiencies.

However, there's a more intriguing effect that the company is seeing across its Anthropologie, Free People and Urban Outfitters chains. "We are seeing the ability to have higher price points online than we can have in stores," Hayne said. "The customers are reacting to higher price points more favorably for the product online than they do in stores."

Hayne credits the difference to the ability to use models and photography more effectively online—"To the degree that we offer inspirational outfitting and inspirational photography, I think we can sell a higher-end product and we can sell product at higher margins," he said.

But that's still the exact opposite of what might be called the Amazon Effect: Online, prices should be driven down relentlessly because of almost infinite competition, or so conventional e-commerce wisdom says. Because customers can directly compare products from multiple retailers, the winner will be the one with the lowest price.

And that seems to be true for merchants who can't somehow stand out and end up as commodity sellers. But just as a better in-store experience makes it possible to move price points and margins up for chains like Nordstrom (NYSE:JWN), the same should be true online for an e-commerce site that really delivers the brand experience.

Until now, that was mainly a hypothesis. The fact that Urban can actually beat its own brick-and-mortar stores for price points online makes that idea look a lot more solid.